Event Driven Trading & News

The most important aspect of interpreting news and its impact on equity markets is the determination of the market's expectations for that news. In the financial world, this is commonly referred to as the "market discount mechanism". The correlation between equity markets and news is pretty clear. Expected news has little impact on stock prices while unexpected news, especially when pertaining to news that are considered likely to significantly impact the future earnings of a given company, may have an immense impact.

As a consequence, short-term traders can benefit from closely monitoring real-time financial newswire services from Dow Jones, Reuters, and Bloomberg as they are excellent gauges of current sentiment towards potential news events. Being aware of events and expectations allows traders to be fully prepared for, and profit from, the discounting of potential market moving events. Applying news analytics as part of an event driven trading strategy makes it possible to "listen in" on the news in a fully or semi automated fashion.

Event-driven trading is a fundamental based methodology that attempts to exploit the volatility associated with economic releases, political announcements, and corporate events. Often, it can be difficult to determine the effect of news on stock price movements only considering the type of event. Therefore, to better understand the likely direction of the stock price, it is useful to consider the news sentiment built up towards the scheduled corporate announcement; thereby making it possible to adhere to the old Wall Street adage of "trade on the rumor, and sell on the news".

Incorporating news analytics into one's trading model environment makes it possible not only to form structured opinions about scheduled events including earnings announcements, but also to trade on unscheduled events such as executive appointments, product recalls, lawsuits, or layoffs; which often have significant market impact. Such news events can be detected in real-time with millisecond latency, with trading decisions made based on the story sentiment as it relates to the entities being mentioned. In previous blog postings, I shared some research on the stock price impact of unscheduled news events on not only hours ahead, but as much as 60 days following the event.